Efficiency Coordination: Government Regulation and Market Mechanism Synergy

This chapter investigates the optimal interplay between governmental policies and market-based instruments for achieving carbon emission reductions. Recognizing the evolution of global climate governance from top-down mandates to bottom-up contributions, the chapter emphasizes that mechanism choice must align with national circumstances and reduction targets. It contrasts government regulation (often command-and-control, deriving implicit carbon prices) with market mechanisms (quantity-based, like ETS, or price-based, like carbon taxes, forming explicit prices). Efficiency emerges as the pivotal criterion for selecting and coordinating these approaches. Drawing upon climate economics and neo-institutionalism, the analysis highlights the inherent limitations of employing either mechanism in isolation. While government regulation can ensure target achievement, it may lack cost-effectiveness and innovation incentives. Market mechanisms excel at optimizing resource allocation and minimizing societal costs by balancing marginal abatement costs but face risks like price volatility or potential failure to meet targets. Consequently, the chapter advocates for hybrid or mixed mechanisms, which synergistically leverage the strengths of both—government oversight ensuring stability and direction, and market forces driving efficiency and innovation. The chapter introduces analytical methods for evaluating and coordinating these mechanisms, including computable general equilibrium models (CEEPA-CETA) for simulating economic impacts and the “relative slope criterion” derived from Integrated Assessment Models (C3IAM) for guiding the choice between price and quantity instruments under uncertainty. Practical strategies for enhancing market mechanism effectiveness are discussed, focusing on institutional robustness (e.g., MRV systems), broad participation, auction design, and the development of carbon finance. Ultimately, the chapter concludes that a well-coordinated, context-specific blend of government regulation and market mechanisms is crucial for maximizing carbon reduction efficiency and achieving climate goals cost-effectively.